Will Asset Protection Trusts Protect Assets From Medicaid Agencies?

There are several types of trusts that are useful asset protection tools.  Asset protection trusts include irrevocable trusts with spendthrift provisions, offshore trusts, and domestic asset protection trusts available in some states (other than Florida).   I have been asked from time to time whether an asset protection trust will protect assets from being considered in an application for Medicaid eligibility.  The question is whether one can remove their assets from Medicaid’s asset ceiling (about $2,000) by transferring their assets to a trust that does protect assets from potential judgment creditors.

Medicaid eligibility will count all assets held in a trust in which the Medicaid applicant has, or could have any beneficial interest. The definition is very broad and encompasses contingent future interests or reversion interest.  If the Medicaid agency can image the applicant getting some benefit, any amount of benefit, under any circumstances all assets in the trust will be considered to belong to the Medicaid applicant. Spendthrift trust provisions that effectively protect the beneficiary’s trust interest from civil creditors do not shield a trust from Medicaid analysis.

There are some trusts that a Medicaid applicant can create to protect his income from being taken to pay for his care in a skilled nursing home while he is receiving Medicaid benefits. These trusts will permit the applicant to fund the trust with any income over Medicaid’s income ceilings and use the trust income for the applicant’s benefit while he is getting Medicaid benefits. Any income or assets in trust at the time of the applicant’s death will be taken by the Medicaid agency to reimburse the state for the cost of care.

The provisions of these Medicaid Trusts (also called “Miller Trusts”) are substantially unlike the provisions of trusts designed for asset protection. Using any type of asset protection trust form to protect assets from Medicaid agencies may deprive the applicant of money used to maintain a comfortable standard of living in a nursing home.

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Make Sure Your Compensation Plans Are in Order and Documented

I recently finished resolving a dispute between a client and the IRS regarding the amount of compensation for the founder and owner of a corporation. While the amount of compensation during one of the years at issues was probably unjustifiably high if viewed by itself, the person's compensation over the years (and including the year in dispute) was readily justifiable when viewed over the entire period that the person worked for the business. We ended up resolving the dispute and the resolution was within $50,000 in compensation from my initial evaluation of the case. But it was an expensive "victory" for the client.

The strongest point for the IRS, and the reason it took as much time and expense to resolve, was the client’s lack of documentation of a consistently applied compensation plan. The client had annual minutes (which many clients do not), but those minutes did not address how the owner’s compensation was determined. The client also did not have a written employment agreement, nor did they have any written (or “understood”) basis for calculating the client’s incentive compensation each year. This lack of a consciously determined pattern to the compensation ended up costing the client several thousand dollars in attorneys fees, and a like amount in additional taxes.

The moral of the story: properly pay and report compensation to employee/owners as such; have a written employment agreement or at least some sort of documentation in your minutes of the oral arrangements for compensation; make sure you have a documented or easily proved method for determining incentive compensation that is reasonable in amount.

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Non-Resident Capital Gains Tax Penalties

Since April 2017, non-UK residents selling a UK residential property have been required to report the disposal to HMRC within 30 days of completion and pay capital gains tax on this as appropriate, or run the risk of incurring substantial penalties. These new rules are usually referred to as Non-Resident Capital Gains Tax and this blog looks at penalties which are imposed by HMRC for non-compliance.

See our full article on Non-Resident Capital Gains Tax here.

What are the consequences if you miss this deadline?

It will come as no surprise to learn that HMRC will penalize you if the return is not filed on time, with the level of penalties raised dependent upon how late the return is.

• An initial penalty of £100 in all cases;
• daily penalties of £10 for returns filed between 3 and 6 months late, subject to a maximum of £900 (but these are discretionary, see below!);
• a further penalty of 5% of the tax due, or £300 if greater, for returns filed more than 6 months late;
• a further penalty of 5% of the tax due, or £300 if greater, for returns filed more than 12 months late.

That’s a total of up to £1,600 (or £3,200 if the property was sold in joint names) for missing a filing deadline many people are unaware of.

Can the penalties be cancelled?

In spite of the penalties being disproportionate to any tax which may or may not be due, HMRC’s stance is unforgiving and will not entertain an appeal unless there is, what they consider to be, a reasonable excuse for failing to file on time.

A crumb of comfort?

However, we have recently seen a breakthrough in a number of our client cases and HMRC have accepted that daily penalties will not be applied, these have been removed and it is understood that HMRC will no longer issue daily penalties. The remaining late filing penalties will still be charged, but this mitigates the potential costs significantly.

Whilst this is positive, it does still leave a bitter taste in the mouth for clients who, quite understandably, were unaware of the filing requirement and were not advised of this by the solicitor dealing with the conveyancing work.

If you are a non-resident selling UK residential property we recommend you file on time if you have failed to file your non-resident CGT return or have filed late and been penalized with daily penalties you also need to take action now and should contact us for further assistance.

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3 Ways to Get a Fresh Start with the IRS

Who couldn’t use a fresh start—especially when it comes to alleviating tax debt? If getting rid of debt were as easy as closing our eyes and snapping our fingers, we’d never learn the meaning of discipline. No, if getting rid of debt was that easy, then the Internal Revenue Service (IRS) wouldn’t even be necessary. But debt is a real thing that plagues most American taxpayers and while many may have it under control, there are millions who don’t. That uncontrollable debt can spill over to having issues with federal debt—something you might want to avoid altogether if at all possible.

Yet, many don’t.

The IRS’ Main Job

And aside from collecting tax debt, the IRS is very necessary for ensuring that the taxes collected are fully accounted for so that lawmakers and congressmen can disperse them to the proper legislative channels. In order for them to do this, they need to have an accurate budget of the numbers. This is projected by the number of American taxpaying citizens and their household income. The level of their income will determine exactly how much they owe in taxes.

So if those taxpayers who owe don’t file or pay the amount that the IRS claims they owe, this puts the US Treasury in a compromising situation. Take, for example, your paycheck. If you’re expecting a certain amount of money to be directly deposited into your bank account, then chances are you may have already planned to spend that money on paying bills, groceries, etc. If you don’t receive that check, then you’re put in a compromising position. With the US Treasury, they’re in a compromising position that could be well into trillions of dollars!

Success Tax Relief does not want you to be in a financially compromising predicament. If there’s a way we can help you get a fresh start, then we want to provide you with 3 simple steps in helping to clear your tax debt once and for all.

  1. Monthly Payments

Even if you owe the IRS thousands of dollars, they will work out a monthly payment plan that won’t leave you in hardship. All you need to do is communicate your intention to pay.

  1. Avoid Tax Liens a Little Better

There’s really nothing that you need to do to make this work for you except avoid your tax debt from increasing. To do this, just avoid any missed or late payments because late payments equal penalty fees, and penalty fees and missed payments mean you’ve forfeited the payment agreement, and you’re right back to where you started—in debt and/or in trouble!

  1. File for an Offer in Compromise

It’s quite possible that you might be eligible for an Offer in Compromise that allows you to pay less than you owe. This isn’t an option that everyone is qualified for. Each case is different.

To determine if you qualify for an Offer in Compromise or if you need assistance working out a monthly payment plan to the IRS, then contact veridianfinance Tax Relief for a free consultation. 

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The True Cost Of Paying An Employee

The true cost of paying each of your employees is significantly higher than their hourly rate. Even if you don’t offer benefits or paid vacation, there are some unavoidable taxes and expenses you’ll incur having employees on your payroll.

Social Security Tax

The tax you pay as an employer funds Social Security benefits. For 2015, you’ll pay 6.2 percent on each employee’s wages up to $118,500. After an employee’s annual wages exceed $118,550, no more tax is levied.

Medicare Tax

These contributions go toward the general Medicare fund. For 2015, you’ll pay 1.45 percent of each employee’s salary as Medicare tax. Unlike Social Security, there’s no wage base limit for the Medicare tax. However, you do need to withhold an additional 0.9 percent from each employee’s paycheck after the person’s wages exceed $200,000 in a calendar year.

Federal Unemployment Tax Act (FUTA)

The federal unemployment insurance system, along with the state systems, funds benefit payments for unemployed workers. For 2015, the FUTA rate is 6 percent of the first $7,000 of employee wages.

State Unemployment Tax

Along with the federal unemployment tax, you may be subject to a state unemployment tax. Tax rates and policies vary by state. Luckily, employers can take a credit for the state unemployment tax they pay against the FUTA tax. The maximum credit is currently 5.4 percent.

Other Expenses

There are other expenses that are hard to avoid when you bring on an employee. All states require that you purchase workers’ compensation insurance once you have someone on the payroll. Rates vary by state, but a 2014 report [PDF] from the state of Oregon noted that the median rate is around $1.85 per $100 of payroll, or 1.85 percent of an employee’s salary. If you’re in California, you could pay up to 3.5 percent of total wages to cover workers’ compensation.

Calculating, withholding, and remitting payroll taxes is a complicated and time-consuming process. An experienced payroll bookkeeper may be able to handle it, but it may not be worth their time for just one or two employees. It might make more sense to pay a third-party payroll provider to handle the process.

What You’ll Pay

Fit Small Business ran the numbers and estimates that employers should expect to pay 10 percent or more to cover payroll taxes, unemployment taxes, and workers’ compensation insurance. Because unemployment taxes and social security taxes phase out after a certain compensation level, you will pay a higher relative percentage of low-paid employees than you will for well-paid onesIf you do business in a state with a high unemployment tax rate and a higher workers’ compensation rate — like New York or California — that will also add on a few more percentage points.

Alternatives

If you don’t want to pay extra taxes, insurance, and payroll processing costs, consider independent contractors and consulting firms. They’ll probably charge a higher rate than what you’d pay an hourly employee, but it may be worth avoiding the taxes and hassle. If you truly need to hire an employee for help, consider your family members first. The IRS offers payroll tax perks to sole proprietors and partnerships that hire children and spouses. If they meet the requirements, small-business owners don’t have to pay Social Security, Medicare or FUTA taxes when they employ their children and can avoid FUTA tax if they hire a spouse.

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How Inventory Valuation Drives Profits and Taxes

The timing of your inventory purchases and sales can have a huge impact on company profits and your tax liability. To understand how inventory impacts a firm’s tax liability, consider the concept of accrual accounting, the issue of inventoriable costs, and inventory valuation methods. You can use this knowledge to project your company profits and calculate the related tax liability.

The Relationship Between Inventory and Accounting

The timing of expenses will impact your company profit and the tax on that profit. Almost all businesses operate using accrual accounting, which means that revenue is recorded when earned and expenses are posted when incurred. Accrual accounting matches revenue with the expenses incurred to produce the revenue.

Assume, for example, that a restaurant owes employees $3,000 for wages earned in the last week of December of 2016. The next payroll pay date is January 5th of 2017. The restaurant incurred $3,000 in payroll expenses to earn revenue during the last week of 2016. Therefore, the $3,000 is a payroll expense in 2016, even though it is not paid until 2017.

This process matches 2016 revenue earned with expenses incurred in 2016. Under accrual accounting, the movement of cash does not drive the accounting entries.

What Are Inventoriable Costs?

Accrual accounting also applies to inventory. When a company sells an item out of inventory, revenue (a sale) is generated, and cost of goods sold is posted to the accounting records. The cost recorded determines the profit on the sale and the eventual tax on the profit.

Inventoriable costs are expenses that should be included with the merchandise held in inventory. Accountants define inventoriable costs as the cost paid to the supplier, plus all costs incurred to “prepare the inventory for sale”. Freight costs are inventoriable costs, as well as costs incurred to make changes or additions to the items in inventory. As an example, when a retailer adds their brand name or logo to an inventory item, it is an inventoriable cost.

Why the Timing of Expenses Is Important

Imagine walking into a sporting goods store that is carrying $300,000 of inventory. None of those costs have been expensed yet. Instead, those costs remain “attached” to each inventory item until the item is sold. Unlike many other expenses, inventory costs do not become expenses until a sale takes place. So, the recognition of these expenses is delayed.

The matching principle means that sales and cost of sales are incurred in the same time period. If the shop sells $300,000 in inventory at a total sale price of $350,000 in March, for example, the store generates revenue ($350,000), cost of sales ($300,000) and profit of $50,000—all in the same month of March.

In many instances, the value placed on a particular inventory item will be different, depending on when the item was purchased. These differences in inventory valuation impact both profits and a firm’s tax liability.

How to Value Your Inventory

A business needs to make decisions about a variety of accounting principles, including inventory valuation. Specifically, you must choose a method to value the inventory you carry, and that decision has an impact on the inventory asset balance, your cost of sales and your profit. As a result, your firm’s tax liability is affected by the inventory valuation method you choose.

Once you select a method, you need to use that method consistently each year. This accounting principle of consistency allows a financial statement reader to compare your results from one year to the next. If you change your inventory valuation method, it distorts your cost of sales and profit results. Here’s an example:

Carpio Hardware operates five hardware stores and generates $10 million in sales. The hardware stores carry lawn mowers in inventory. Here is Carpio’s current lawn mower inventory:

Purchase date Cost Units Total cost
Jan. 15th $200 100 $20,000
Feb. 1st $220 50 $11,000
Feb. 15th $230 75 $17,250
Totals   225 $48,250
&nbsp      
  Sale price Units Total revenue
  $270 225 $60,750

Total Costs, Total Profits

In order to clearly understand the impact of an inventory valuation method, think about the 225 lawn mowers. When you sell a lawn mower, the asset (inventory) becomes an expense (cost of sales).

If you assume that no other inventory is purchased, total profit is ($60,750 revenue – $48,250 cost), or $12,500 profit. It doesn’t matter which inventory valuation method you choose: total revenue, costs, and profits will be the same. The valuation method changes the timing of when profits or recognized from one year to the next, and that timing also impacts your taxes each year. There are several valuation methods to choose from, but the two most popular are FIFO and LIFO.

First In, First Out (FIFO) Inventory Valuation

FIFO assumes that the oldest units are sold first. Since prices generally rise over time, the oldest units are typically the cheapest units. If you sell the cheapest units first, you generate a lower cost of sales and a higher net income. In later periods, you sell the newer, more expensive goods. Selling more expensive items generates a higher cost of sales and a lower profit. In total, however, total profits equal $12,500.

Assume that Carpio sells 150 of the lawn mowers using the FIFO method and that the tax rate is 20%. Here’s the impact:

FIFO Method Cost Units Total cost
Jan. 15th $200 100 $20,000
Feb. 1st $220 50 $11,000
    150 $31,000
&nbsp      
  Sale price Units Total revenue
  $270 225 $40,500
&nbsp      
      $9,500 profit
      $1,900 tax

FIFO labels the oldest units as sold, and then works forward to the newer units. The hardware store assumes that the 100 units bought on Jan. 15 and the 50 units purchased on Feb. 1st are sold. The 75 units (the newest units) remain in ending inventory. FIFO generates a $9,500 profit and a $1,900 tax on the profit.

Last In, First Out (LIFO) Inventory Valuation

LIFO assumes that the newest methods are sold first. Since prices generally rise over time, the newest units are typically the most expensive units. If you sell the expensive units first, you generate a higher cost of sales and a lower net income. In later periods, you sell the cheaper goods. Total profits equal $12,500, regardless of which method you choose.

Assume that Carpio sells 150 of the lawnmowers using the LIFO method, with the same 20% tax rate. Here are the results:

LIFO Method Cost Units Total cost
Jan. 15th $200 25 $5,000
Feb. 1st $220 50 $11,000
Feb. 15th $230 75 $17,250
    150 $33,250
&nbsp      
  Sale price Units Total revenue
  $270 225 $40,500
&nbsp      
      $7,250 profit
      $1,450 tax

LIFO starts with the newest units sold and works backward. In this case, Carpio assumes that the 75 units purchased on Feb. 15th are sold, along with 50 units purchased on Feb. 1st and 25 units bought on Jan. 15. The 75 units (the oldest units) remain in ending inventory. LIFO generates a $7,250 profit and a $1,450 tax on the profit.

Timing Is Everything

Here are the differences in profit recognized when 150 units are sold, and the profit that will be posted when the remaining 75 units are sold:

Method Profit recognized Profit to be recognized
FIFO $9,500 $3,000
LIFO $7,250 $5,250

FIFO generates more profit and tax liability in the early years, while LIFO produces less profit and lower taxes in the early years.

In reality, a business is constantly buying inventory and generating sales, but your choice of an inventory valuation method will impact your profits and taxes over time. A company with hundreds (or thousands) of inventory purchases and sales each month will see the same impact described above.

Planning Will Pay Off

Businesses are strongly encouraged to use accrual accounting so that their accounting records are comparable with other firms. Your company should apply the concept of inventible costs to your decisions about expenses. Once you select an inventory valuation method, take the time to assess how that method will affect your profits and tax liability. With proper planning, you can understand the impact of inventory on your taxes and profits.

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BUSINESS OWNERS' GUIDE TO UNDERSTANDING INCOME STATEMENTS

An income statement (also commonly known as a profit and loss [P&L] or earnings statement), answers a very important question: Is your company profitable? The accuracy of your P&L is critical to ensuring your business is running as efficiently as it could be and to identify opportunities for increasing revenue and/or decreasing costs.

While having an accounting expert on your side is wise to ensure this document is being created accurately, understanding how to interpret income statements oneself is a useful skill for business owners.

Today’s post will provide an overview of what an income statement is and how that data can be utilized to make business decisions.

WHAT IS AN INCOME STATEMENT?

A P&L is most commonly generated monthly, quarterly, and annually, and it provides a working picture of a business’ revenue, expenses, and net income over those periods of time.

At the report’s bottom line, one can see if the company has made a profit, and compare the profit amount with that of previous time periods. This makes the report valuable to lenders, investors, and shareholders in addition to business owners.

You will always see breakdowns for 1) revenue and gains and 2) expenses and losses from primary (i.e., operating) activities and secondary (i.e., non-operating) activities. The primary activities portion discloses information about revenues and expenses that are a direct result of regular business operations, like selling your standard goods or services.

HOW TO USE AN INCOME STATEMENT TO MAKE SMARTER BUSINESS DECISIONS

As with any financial statement or business data you have, it’s only as good as what you do with it and income statements are no different. There is a multitude of ways that your income statement can determine areas and opportunities for growth and change. Here are a few of the most common ones:

  • Deciding whether to hire or downsize
  • Determining which growth opportunities to focus on
  • Uncovering which products or services are generating or losing you money
  • Deciding where to cut operational costs
  • Reevaluating your pricing strategy
  • Negotiating during a merger, acquisition, or sale of your business

HOW TO UTILIZE YOUR INCOME STATEMENT

The P&L is primarily focused on examining the actual operating efficiency of your company by assessing profit margins. Let’s start by defining margin: Gross margin indicates the core profitability of your company. It calculates basic profit levels based on revenue less direct expenses, before any indirect costs. It, therefore, helps in determining the financial success of particular products and services. Net margin, on the other hand, calculates the profit that remains after all expenses, including interest and taxes, have been deducted from your revenue.

You can benchmark your margins against other companies in your industry, or past performance of your own company, to gain insight into which portions of your company are over- or underperforming. This can help you to invest in what will grow your business and address any elements that need improvement. You’ll also need your P&L for tax preparation and loan applications, and your financial advisors will need it to make recommendations for your business.

Understanding income statements is a key part of running your business efficiently and effectively. They not only reveal the health of your income, assets, and associated expenses—they also give you much-needed context for how those change over time. And it all starts with getting an accurate, up-to-date P&L from your accounting partner when you need it.

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How Trump’s New Tax Plan Might Affect Your IRS Debt

It’s really too soon to tell how any changes within the Trump administration will affect taxes, but one thing is certain, if you are currently in debt with the Internal Revenue Service (IRS), it is fully expected for you to pay what you owe. That’s not going to change no matter if the taxes are raised or lowered.

Stay Focused! Do Your Due Diligence.

It’s important to not let your emotions get in the way of your financial obligations to the IRS. No matter who is in office, as United States citizens, it our responsibility to uphold our part and pay the taxes we owe. If for some reason you believe that the amount that you owe is incorrect, you have a right to contest these numbers. You can do this by mail or telephone, although we recommend that you do both—in that order. This way, you’ll have written documentation that proves you’re actively communicating with the IRS, and speaking to a representative by phone will show that you’re following up accordingly.

Need Help with That?

We realize personally speaking to the IRS can be intimidating. That’s why the professionals at Success Tax Relief, a tax relief firm is staffed with a team of tax experts to communicate with the IRS on your behalf.

Back to the Whole Tax Thing!

We realize that you still may be a bit concerned about how Trump’s new tax plan might affect your taxes in the years to come.

The plan has been described as “Reagan on steroids”, a plan that follows the concept of the ‘rich getting richer and the poor getting poorer’—all in theory, of course!

According to White House Reporter, Matthew Nussbaum, who tweeted a photo of the one-page 2017 Tax Reform for Economic Growth and American Jobs, are as follows:

  • The standard deduction will double, but many tax breaks will no longer be available to individual filers except for home ownership and charitable contribution—this will reduce a number of deductions that you’ll be able to claim.
  • The tax relief will be provided for families with dependent care expenses.
  • “Eliminate targeted tax breaks that mainly benefit the wealthiest taxpayers”
  • Repeal:
    • Alternative Minimum Tax
    • Death tax
    • Obamacare
  • For businesses, the overall objective is to level the playing field of the territorial tax system for American companies.

In a Nutshell…

The plan reportedly is not projected to decrease the country’s deficit until after 10 years from now, and it will need a straight party vote. So, as of right now, there’s nothing to be actively concerned about, because it’s too soon to tell. It also doesn’t have much to do with you pay the IRS what you owe.

What Can You Do?

The best thing to do during this continuous transition is to continue taking care of your financial obligations. veridianfinance.com/taxationandadvisory can help you along with this process. We work on your behalf—not for our benefit.

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